The IBR Newsletter

B R IE F COM M E NTS ON R E CE N T N E W S A NDR E S E A R CH

NOVEMBER 2012

Q2 RESULTS: SLOWDOWN CONTINUES

Results of Jul-Sep12 quarter, which is Q2 for most Indian companies, were not very rosy. Sales growth for the quarter came down to around 12%, margins contracted, taking net profit growth to single digits. This is from research reports of various institutional brokers, who tend to track 100-150 companies. We reproduce some insightful charts from various broker reports. Revenue growth has fallen to low double digits now

Sales growth, while not as bad as FY10 in the post Lehman contraction, is the least in the last 10 quarters

EBITA margins are under pressure

BofA Merrill points out that EBITDA margins are the lowest margins in 8 years

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30 Nov12

Profit growth is barely positive

Net profit growth is around 3-4%, barely positive

Healthcare, Consumer Staples post strong earnings growth

Consumer non-discretionary sectors did well on earnings growth, as also IT and Financials

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30 Nov12

GOING FORWARD: HAS GROWTH TROUGHED OUT?

Several opinion makers are beginning to say GDP growth has troughed out. We are not convinced. We see continued pain for atleast 2 more quarters A few broking analysts are beginning to say that growth trough has been reached. Going forward, there will be a revival. So there are two issues here: Has a trough really been reached? If yes, but when will growth revive? From Q3, or 2-3 quarters down the line? Firstly, see the trend in GDP data

GDP growth has slowed to below FY09 levels. The market does not seem to recognise that we are much more trouble now than in FY09

Source: Microsec

Our own view is that this may not be the trough yet. Even if it is, we do not see any revival for the atleast 2 quarters. Why because we cant see where the revival will come from: Consumer demand? No; Investment demand? No; Government demand? No, again. Once again, check some data Investment demand unlikely to revive for 4 quarters

See the Capex data below. It is clear FY13 will see a contraction as compared to FY12. Remaining 2 quarters of FY13 are likely to be down on a y-o-y basis. The first 2 quarters of FY14 could also be down on a y-o-y basis. Capex needs to pick up 3-4 times for growth to show in first 2 quarters of FY14. This is unlikely to happen.

Source: Antique Research

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Slowdown ahead in consumer demand

30 Nov12

The charts here are from a Urban Consumer Survey by Religare Institutional Research.

If we restructure some of the data, we can derive a Consumer Confidence Index. The CCI as per this data slid from around 71 a year ago, to 57 now. While this is still positive (a read above 50 is considered positive), in couple of important chunks, it is lower. Consumers in metros have a CCI of around 50 and consumers in high income bracket seem to have a CCI around 48.

Source: Religare While the data in this Religare survey is from a small sample of around 900, we agree with its general findings. Consumer demand can only side when inflation is running at close to double digits. When will consumer demand revive? We cant say, all we can say is, it will certainly contract in the next 1-2 quarters.

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Government demand can only contract

30 Nov12

Fiscal Deficit (% to GDP)

FY08 FY09 FY10 FY11 FY12 FY13E

India has lost the battle against fiscal deficit

-3.1

-4.9 -6 -5.9 -6.4

-5.6

Source: India Business Reports

We have been holding this view right since FY10 that Indian government screwed up big time on fiscal deficit. While in FY09 there may have been some ground for a hike in spends, what they did in FY10 was criminal. The government has doomed India to several years of slow growth. Anyway, now, when we are in trouble on growth, the government is not a source of growth. The government is under pressure to control deficit. It budgeted for 5.1% (at the centre), but with revenues below par, deficit will overshoot. So the government will cut expenses, and is hardly likely to drive growth. So where is the growth driver? External factors are our main hope Chanda Kochhar, chairperson of ICICI said last week that, With the measures that the government is planning, I expect a hockey stick-shaped recovery soon. While is being optimistic about the hockey, she is right about the government measures. The UPA government is showing some spine on FDI measures, which is good. FDI is can be one reviving factor both through extra funds, revival of sentiment. Exports can be another source of revival. Exports have shrunk so far in FY13, a reversal will lead to growth pickup.

External triggers may be needed to revive growth. We expect FY13 GDP growth at 5.5%, and FY14 around 6.2%.

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30 Nov12

INDIAS RESTAURANT SECTOR

At IBR, we are currently doing research on the restaurant sector. Here are some of our key findings: Indias Restaurant Market
350,000

70.0
60.0 50.0
($bn)

(Rs Crore)

Indias Restaurant market was roughly $24bn (Rs 1.21 trillion) market in 2011-12

300,000 250,000

200,000
150,000

40.0 30.0 20.0 10.0 0.0

100,000
50,000 1999-2000 2004-05 2009-10 2011-12E 2014-15P 2019-20P

1999-2000 2004-05

2009-10 2011-12E 2014-15P 2019-20P

Source: India Business Reports

Restaurant Market - Top Metros (Rs Crore)

Restaurant Market - Top Metros ($mn)

1400 1200 1000 800 600 400 200 0

The top 8 markets represent a market size of around $5bn.

7000 6000 5000 4000 3000 2000 1000 0

Chennai

Delhi

Greater Mumbai

Pune

Hyderabad

Ahmedabad

Kolkata

Delhi

Chandigarh

Hyderabad

Chennai

Kolkata

Same store sales have grown at a CAGR of 20% over 2005-10 We have several insights here. Contact us to learn more about Dominos has 3% market share of Delhis restaurant market Coffee chains are struggling to make money. Barista is making operating losses since inception

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Ahmedabad

Chandigarh

Greater Mumbai

Pune

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30 Nov12

About India Business Reports India Business Reports (IBR) is an initiative of experienced professionals with comprehensive experience across wide domains Research, Investment Banking, Private Equity Funding, Consulting, Branding and Marketing. The single minded objective at IBR is to generate insightful reports based on hard facts. Our endeavour is to search for a Big Idea, among seemingly un-connected data points, which has significant strategic relevance. So be it India entry strategies, growth strategies, M&A opportunities or private equity investments, our reports can become a powerful tool in many ways. Our content and expertise is relevant not only for the financial fraternity, but also global MNCs looking to do business with India, and Indian companies looking to fine tune their growth strategies.

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